Hi all, I have been behind on posting the transcripts for my podcast episodes. So here is the one on episode 35. This is a tribute episode to William Nordhaus, the grandfather of climate economics.
His research also influenced my PhD. It is largely based on his autobiograpy essay, which I can recommend to anyone!
Transcript
We have covered already quite a lot of topics on this podcast. But today I want to talk about nobel prize winner Bill Nordhaus. In 2018, Bill was awarded the Nobel Prize in Economics for integrating climate change into macro-economic analysis. He is kind of a godfather of the climate economics field, developing key concepts and models in the field. And concepts like ths social cost of carbon all are originating from his research.
But did you know that his famous 1992 paper that was central to the work for which he got the Nobel was initially rejected by economics journals before it got published in a science journal? However, he then got it published in Science. And then economists started to realise the genius of this work. And you know, they said of Helen of Troy that her beauty launched a thousand ships. Well, of Bill Nordhaus, you could say that his 1992 paper launched a thousand papers in climate economics.
But what made this model so important? Well, Nordhaus helped us answer a pretty radical question: what is the economic cost of emitting more carbon? Or put differently: can we actually put a price on climate change? So how did he create the model that allowed economists to answer that question?
Well, in this episode we are going to cover that in 3 parts. First, we will look at the early life and apprenticeship phase, where you can see the early genius. The second part will then cover his first steps into the Wild West of early climate economics. And then the third chapter will get to how he Cracked the Code.
I also think this is a wonderful journey to the early days of our field. And I have based this episode for a large part on his autobiography essay that Bill wrote in 2018. I highly recommend reading it. The man is not only brilliant. He also is an amazing writer. So I will quote from him to give you a sense of the man.
Part 1. Early Life and Apprenticeship
So William Nordhaus was born in Albuquerque, New Mexico, in 1941. Now, one thing to note is that young Nordhaus loved skiing. So he set out to model the chance of snowfall through mathematics, an early sign of what was to come.
Then Nordhaus went to Yale for his undergraduate studies and to MIT for his PhD. So, equipped with the cutting-edge macro-modelling tools, Nordhaus kind of devoted himself to a lot of areas. He created models of railroad profits, of the US macroeconomy, of the patent system, of inflation, of productivity, and of induced technological change. That is a crazy wide set of topics.
But then he turned to energy models, modelling oil and energy prices, developing a modell he called the Bulldog model. This is important and we will later return to it. But first, two events happened in 1970 which would change the course of his career.
Part 2. His First Steps in the Wild West of Early Climate Economics
The first event that changed his career was in 1970, when a group of scientists released a visionary MIT report on humanity’s impact on global climate. This hooked him.
And then in 1974 he had a research stay in Vienna where he shared an office with a climatologist, Allan Murphy, who encouraged him to study the impacts of the economy on the climate system. These two events got Nordhaus got focused on cracking this problem of measuring economic damages.
So the drive was there, but there was an issue. Nordhaus did not know much about how the science worked.
“I knew nothing about the scientific aspects of climate change, zero. I set out, beginning at [Vienna], to learn about the relevant sciences. I later thought it was fortunate I had not studied the sciences in school because they would be outdated, like the biology course I took in 1958 that did not mention DNA.”
So he set out to teach himself the relevant climate science.
His first step in integrated modelling of climate change was actually quite straightforward. He started with his existing model of the energy sector, his Bulldog model. Because remember, he had developed that one already. And then he added, on top of the Bulldog model, emissions of CO2 and some other features, which he published in 1977. By the way, this was a model using programming on that period’s large computer and stacks of IBM cards. After a couple of months of programming, clearing computer jams, and fixing bugs and mistakes, Nordhaus ended up with the first integrated assessment model of climate-change economics.
Also, a great side story here. He started working on this when his program leader tells him essentially: Stop. Climate isn’t in the work plan. You need to focus on Nuclear Energy And Nordhaus’s reaction is wonderfully revealing about his determination. He compares it to skiing: if there’s a bare patch, you go around it. So he went to director Howard Raiffa, gets transferred to another programme and continues the research. In his biography, Norhdaus indicated that the work was not slowed more than a couple of hours. You got to love that.
Now, in his 1977 model, this is where something very interesting started to happen. The model started generating what economists call a shadow price on CO2. In other words, it was beginning to put an economic value on the damage created by additional emissions. This was an early version of an idea that would later become central to climate economics: the social cost of carbon.
So this is really the first moment in our story where Nordhaus starts to put a price on climate change.
But the model was still far from complete. Nordhaus was dissatisfied because of two reasons. The first reason is that his 1977 model was a partial-equilibrium model. That means that some parts of the model were fixed, and kind of acted independently of the other parts of the model. The second reason is that it had no damage function. That means that there was no proper impact of the climate on the economy. The economy could influence emissions and the climate, but the climate did not yet properly feed back into the economy.
Part 3. Cracking the Code
Over the next 20 years, Nordhaus started to work on cracking the code.
1. Let’s hear it from him in his autobiography: “Over the next two decades, I moved from model to model like a pilgrim trying to reach the Promised Land … Accomplishing these two goals took nearly two decades, and what finally emerged was the DICE model (The Dynamic Integrated model of Climate and the Economy)..
2. The main goal was to fix the two major flaws of the earlier model. These were to develop a general-equilibrium framework and to develop the modules of the climate externality. Accomplishing these two goals took nearly two decades, and what finally emerged was the DICE model.
So summarising a two-decades-long journey is not easy, but we’ll try. The first major step was to move away from a partial-equilibrium model to a general-equilibrium model. To do so, he scrapped the very large energy Bulldog model and moved to a Ramsey model of economic growth. This he accomplished through his extensive economic expertise. Now, a general equilibrium model is great, but he still needed the 2nd part, the climate equations And he needed 5 specific elements to make it work, none of which existed at a reasonable level for the model he wanted to build. These 5 are the following:
Emissions: going from economic output to CO2 emissions.
A carbon cycle: CO2 dynamics.
A climate module: going from changes in greenhouse gases to temperature changes.
A damage function: going from temperature changes to economic damages.
An emissions-control variable: representing how much society chooses to reduce emissions.
Nordhaus says none of these major modules existed in a form suitable for the economic model he wanted to solve.
Now, number 3 and 4 were the hardest, so let’s discuss those.
Number 3 is the climate-module question. In other words, how do you go from CO2 to temperature? Now, there are lots of climate models by scientists that do this. But these often have hundreds of thousands of variables and take a month to solve on a supercomputer. So this would slow down the Ferrari model of Nordhaus, who needed a few climate equations, definitely less than 12, and definitely not a dozen thousand.
So this search was crazy hard. But then around 1990, he met someone who would provide the key: Stephen Schneider. Schneider had developed the Schneider-Thompson model, a very compact 2-equation climate model. Now, the genius of the Schneider-Thompson approach was to rely on radiative forcing, or the Earth’s heat balance, in a way that could integrate beautifully with Nordhaus’s model. So going from hundreds of thousands of equations to 2 is massive. And in his biography Nordhaus mentioned that he still sends Stephen a message of prayer whenever he thinks of him.
Now the second hard part is the damage function. That means: how do you go from temperature increases to harm to human society? Well, damage functions started being developed in the 70s and 80s, so that by around 1990 it was possible to make estimates of damages along a climate path.
With the code cracked, Nordhaus then brought it all together in the DICE model, the Dynamic Integrated model of Climate and the Economy.
And this is really the crucial breakthrough. The economy produces emissions. Emissions affect the climate. The climate affects temperatures. Higher temperatures cause economic damages. And those damages feed back into the economy.
And because Nordhaus had finally closed that loop, the model could also estimate the economic cost created by additional emissions. That is what makes the idea of a social cost of carbon possible: you can now connect an extra ton of emissions to future climate damages and express those damages economically.
So DICE did not just model climate change. It gave economists a framework for asking: what should carbon cost?
And while the first major study got rejected by economics journals, Science accepted it in 1992. And this beautiful model is still a benchmark model more than 30 years later.
And I think that is why the description “the man who put a price on climate change” fits Nordhaus so well. He did not discover one final price of carbon that everyone now agrees on. Economists are still debating what that price should be. But he helped create the framework that made it possible to calculate the hidden economic cost of carbon emissions in the first place.
So the story starts with a boy trying to model snowfall in New Mexico, and ends with a model linking the global economy to the global climate. And along the way, helping economists put a price on climate change.
This was my tribute to one of the founding fathers of climate economics. If you liked this video, please leave a like or subscribe below. And definitely leave a comment if you would like something else covered.
So thanks for tuning in.